Faulty Colonial Theory, Faulty Remedy

Last week, I called for a new look at the version of colonial exploitation espoused by leaders of our Independence movement. That version was misconceived, and so led to misconceived remedies after Independence.

India, a great power before the British came, was poor and relatively backward when they left. Nehru blamed this on the British Raj, accusing it of de-industrialising India and forcing it into a free- trade pattern which obliged it to export commodities and import manufactures.

Data from the first half of this century show that the de-industrialisation theory was simply false. The share of industry in India’s GNP virtually doubled from 3.8 percent in 1913 to 7.5 percent at Independence. The share of manufactures in exports rose from 22.4 per cent in 1913 to 30 percent by Independence, while the share of manufactures in imports fell from 79.4 per cent to 64 per cent. No de-industrialization here.

Nationalist historians argue that even if the share of industry in GNP increased under the British, the share of industrial employment in total employment declined. But this was largely because handlooms were decimated by mill-made cloth. This was technological change, not colonial exploitation. Handloom weavers in Europe lost their jobs no less than those in India.

But, some will ask, even if we acknowledge some industrial progress in 1900-47, did not the British try earlier to stifle Indian industry? Did they not erect barriers against Indian textiles when these were competitive in the 18th century? And after the industrial revolution made British textiles cheap, did not Britain deny Indian textiles protection? All this is certainly true. But Nehru and his colleagues did not take the position that, after retrogressing in the 18th and 19th centuries, India had progressed in the 20th century. They believed the Raj was de-industrialising the country in the 20th century too. Since their facts were wrong, so were their proposed remedies.

They confused India’s relative industrial decline under the Raj with absolute decline. India got one of the greatest railways networks in the world during the Raj, its first modem textile mill in 1954 (well before Japan’s Meiji restoration), and first steel plant in 1912. This was not de-industrialisation. But, in relative terms, India was left far behind.

In 1830, India accounted for 17.6per cent of global industrial production against Britain’s 9.5 per cent, but by 1900 India’s share was down to 1.7 per cent against Britain’s 18.5 per cent. India’s relative decline was due mainly to Britain’s early start in the industrial revolution, not the free-market policies of the Raj. But Nehru believed otherwise, and so followed faulty policies which, ironically, led to India’s further decline in relative terms (it was overtaken by the countries of East and South-East Asia).

Our leaders were certainly right in accusing Britain of extracting India’s wealth. The net transfer of capital from India to Britain during the colonial period averaged 1.5 per cent of GNP. This was less than the 10 per cent of GNP extracted from Indonesia by the Dutch. But it was nevertheless a substantial drain that reduced investment and growth in India.

The transfer to Britain was financed by a trade surplus. India’s export-import ratio was 172.5 per cent in 1840-69, 148 per cent in 1870-1912, and 133.4 per cent in 1913-38. Indian leaders interpreted this to mean that export-orientation was a tool of colonial exploitation, and free trade was a British ploy to force its manufactures on India and crush domestic industry.

So they wanted independent India to aim for self-sufficiency and import substitution instead. They forgot that, before the British came, India was a great trading power that used exports to become prosperous. Export-orientation did not help India during the British Raj because it was used to finance the transfer wealth to Britain rather than invest the gains in India. Indian leaders failed to see that once India became free, it could regain its old historical greatness as a trading nation. Instead Nehru opted for a fuzzy variation of soviet self-sufficiency. India’s share of world trade declined from 2.2 percent in 1947 to 0.6 percent by 1980. Meanwhile East Asians became rich through trade orientation.

India was colonized by the East India company. This led to the knee-jerk notion among Indian leaders that all foreign investment led to colonial domination. Indian leaders jeered at Hong Kong, Taiwan and Singapore for inviting multinationals, which they thought would lead to enslavement and impoverishment. In fact, India stayed poor while the others prospered.

In the first half of this century, India’s GNP grew by only 1.3 per cent per year. Under Nehru (1947-64), India’s growth rate almost tripled to 3.5 per cent. Nehru saw this as proof positive that India had nothing learn from western free-marketers or their East Asian puppets.

This, again, was a sad misinterpretation of history. The first half of the century was economically disastrous not just for India but for the whole world. Two world wars and the Great depression meant led to global stagnation and distress. India’s slow growth in this period probably owed more to global stagnation than colonial exploitation. Once the post-war boom began, several Third World countries began to grow by 8 to 10 per cent per year. This showed that the Nehruvian rate of 3.5 per cent, originally cheered as a great achievement, was really slow in the new international climate. Alas, our leaders found a thousand excuses to pretend that the experience, of other fast-growing countries was irrelevant for India.

The industrial revolution and spread of education in Britain led to a huge improvement in human capital and institutional development (reflected in better forms of organisation and governance). This raised productivity, and contributed far more to Britain’s wealth than colonial loot. We know today that human and institutional development is vital for prosperity.

This was not understood by nationalist leaders in most colonies, who believed Britain was rich only because it controlled colonial resources. So after Independence Zambia nationalised copper mines, Sri Lanka nationalised tea plantations, Tanzania nationalised everything. This failed to enrich these countries, or impoverish Britain.

Once we recognise the key importance of human and institutional development, we can see additional reasons for the failure of India and Africa after independence. India’s failure owes much to its neglect of human capital (Its literacy today is only 52 per cent, against over 70 per cent in many African countries and over 90 in many Asian countries). Africa’s failure owes much to the collapse of its institutions (thanks to civil war and callous dictators). East Asia’s economic success, on the other hand, can be attributed to its success in developing both human capital and institutions.